IIPS
Institute forInternational Policy Studies•
IIPS Policy Paper 289E
May 2002

Energy Security:
Strategic Viewpoints

YUJI NAKAMURAINSTITUTE FOR INTERNATIONAL POLICY STUDIESThe Institute for International Policy Studies was establishedin June 1988 as an independent research center. In cooperation with other domestic and international research organizations, IIPS examines global security, economic, andenvironmental issues, and proposes policies to address
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Institute for International Policy Studies 2002

IIPS Policy Paper 289E
May 2002

Energy Security:
Strategic Viewpoints

YUJI NAKAMURA

Energy Security: Strategic Viewpoints

Energy Security:
Strategic Viewpoints

Why energy security now?

Over the past few years, the international oil market has become increasingly unstable. In
particular, since the terrorist attacks of 11 September 2001, a number of different factors
have caused a surge in oil prices, including the United States’ “War on Terrorism” (specifically,
the possible attack against Iraq); the tensions in the Middle East sparked by the Israeli-Palestinian
conflict; Iraq’s temporary suspension of oil exports; and the dispute involving Venezuela’s
state-run oil company. This has resulted in worldwide concern regarding energy security. Japan,
which imports almost 100 percent of its oil from overseas and relies on the Middle East foralmost 90 percent, must constantly be on its guard.
At the same time, a series of developments in the realm of the environment—the obverse
side of the energy debate—have occurred. These include the ratification of the Kyoto Protocol(which Japan signed on 4 June), the holding of the World Summit on Sustainable Development(the Johannesburg Summit) in August 2002, the deregulation of the domestic electricity market,
and progress in the continuing debate on the introduction of a “CO2 tax” and an “environmenttax.” These raise the complex and challenging question of how to manage both energy security
and environmental protection in the current protracted economic recession. To continue focussing
solely on the domestic technical and economic aspects of this discussion, as has been the custom
in the past, does not constitute an adequate response to this challenge. It is vital that these issues
be examined comprehensively from political and strategic perspectives in a much broader
international context. This is because, internationally, the issue of energy resources, such as oil,natural gas and nuclear power, is highly politicized.

Market orientation and the “commoditization” of oil
After the two oil crises which rocked the world in the 1970s, the 1980s and 1990s appear inhindsight as a period during which the market principle was at its zenith. The market principle
refers to the ideal of trusting market mechanisms and keeping government intervention to aminimum. What were the factors that supported this golden age of the market principle?
Firstly, although they took some time to do so, market mechanisms were instrumental inresolving the oil crises of the 1970s. The two oil crises, the first of which occurred in 1973,
brought about stagflation in the global economy. The developed industrialized nations overcame
these crises, not by virtue of political or diplomatic might, but by the application of “market
power” price mechanisms. Specifically, they responded by developing alternative forms of

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energy and energy conservation. The oil crises came about because of the policy of theOrganization of Petroleum Exporting Countries (OPEC) of using oil as a “strategic product.”
The fact that these crises were resolved through the market engendered trust in market
mechanisms.
Secondly, the collapse of the Soviet Union, which had been a great obstacle to market
mechanisms for such a long time, can also be cited as a factor. Due to the failure of its planned
economy, the Soviet Union collapsed in 1991 and, as the Commonwealth of Independent States(CIS), embarked on a path of conversion to a market economy. China likewise is now undergoinga similar process of transition to a market economy. In the oil market, meanwhile, the“commoditization” of oil has been proceeding at a rapid pace. In the 1980s, non-OPEC members
such as the North Sea nations increased their share of oil production, thus reducing the dominanceover the market held by OPEC, which treated oil as a “strategic product.” From the latter halfof the 1980s through to 1999, the crude oil market developed steadily as the supply-and-demandsituation for oil eased. Against this backdrop of the “commoditization” of oil, the types ofcontracts used in crude oil trading changed from fixed-price contracts to market-linked contracts.
Energy issues no longer featured on the agenda of the summit meetings held by the majorindustrialized nations, and it was a time when awareness of energy security was probably at its
lowest ebb. Some proponents of the market principle held the naive opinion that deregulationand liberalization of the oil market were the true keys to energy security.

The limitations of the market principle
Towards the end of the twentieth century, however, the limitations of the market principle
became increasingly conspicuous. Those limitations were not simply attributable to “market
failure,” which is inherent in a market economy, but also included the market’s inflexibility
within the context of the times.
Firstly, in recent years the risk of markets raging out of control has increased substantially.
With the end of the Cold War, progress has been made in the peaceful use of military technology.
A typical success story is the progress of the information technology (IT) revolution that began
in the United States. As a result of market globalization driven by the IT revolution, it has
become increasingly difficult for central governments to control their markets. The financial
crisis that struck Asia in 1997 is an example of markets running amok. Since the second half ofthe 1990s, the price of oil has been extremely volatile. Ten years after the end of the Cold War,
the possibility of a war between nations has declined. As markets have globalized, however,
the threat of asymmetrical conflicts, including those involving acts of terrorism, has increased.
Secondly, there has been increased interest in global environmental issues. It is far too
risky to consider global environmental issues in a historical context and to rely on markets toresolve them. European countries are very positive about the Kyoto Protocol and it is interesting
to note that center-left factions are skeptical of the market principle.

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Thirdly, it is to be expected that regions and nations which do not appear to be official
participants in the market economy will play leading roles in the energy market at the beginningof the twenty-first century. In what is rapidly becoming common knowledge among energy
experts, Asia, particularly China, will emerge as the leading player on the demand side, while
the nations of the Middle East will recover their share of oil production on the supply side.
China became a net importer of oil in 1993 when its domestic oil production peaked; given its
steady economic growth since then, China’s oil imports are expected to increase rapidly. China
currently accounts for around five percent of global oil demand, and this will double by 2020,
by which time oil demand in the whole of Asia will represent around one-third of total world
demand. (Although some people are pessimistic about China’s economic growth outlook due
to ethnic minority issues, political corruption and other problems, most observers expect China’s
economic growth to continue, boosted by the building of industrial zones near the core cities
along the coast such as Shanghai and Shenzhen, China’s hosting of the Beijing Olympics in2008 and the holding of the Shanghai World Expo in 2010.) In the mean time, despite therecovery of oil production in the former Soviet bloc, as noted by some commentators, by 2020
the Middle East is expected to again be supplying over 50 percent of the world’s oil—up fromits current level of 40 percent.
There is, of course, no guarantee that China will always act rationally based on the market
economy. Warning bells have been sounded many times over the past decade that China’s
energy demands may destabilize East Asian security. Some commentators point out that China
is reinforcing its naval power in order to defend its sea lanes of communication (SLOCs) withthe objective of securing transport routes from the Middle East, and that its desire to develop
marine resources and increase its military presence in the South and East China Seas may
prompt it to adopt a hard line in its unresolved territorial sovereignty disputes.
There is no guarantee either that the oil-producing nations of the Middle East will act
rationally in an economic sense. In reality, the production records of OPEC members are notvery reliable. Like Iraq, some Middle Eastern nations still want to use oil as a “strategic weapon”.
As indicated by the fact that 15 of the 19 young conspirators in the 9.11 terrorist attacks were
Saudi Arabian by nationality, the rise in the unemployment rate among the young generation
caused by the rapid growth of the Saudi Arabian population cannot fail to put the current regime
at risk, even though Saudi Arabia is a moderate nation (which would welcome a stable oilmarket). Undoubtedly, some countries in the Middle East may make use of oil as a political
weapon in some way in order to maintain their regimes.
Interestingly, it is not only the liberals of the center left who point out the limitations of themarket principle; conservatives—the very proponents of “small government”—are also attacking
them. This is because an out-of-control market would lead to threats to security. Economic
globalization spurred on by the IT revolution and global-scale environmental issues have givenrise to problems whose solutions will require complex and multi-layered measures that transcend
the conventional confrontation between conservatives and liberals over the “distance” between
market and government.

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Strategic measures adopted by Europe and the United States
Concerned about the detrimental effects of the market principle on the energy market, the Bushadministration announced a “National Energy Policy” on 16 May 2001. The United States
faced serious energy problems in the second half of the 1990s, namely violent fluctuations inoil prices and the electric power crisis in California. These problems prompted a restructuringof energy security strategy by the government. The excessive increase in risk caused by the IT
revolution and market globalization have robbed energy-related businesses of the will to invest
in new facilities. Even the major oil companies, with their abundant cash flows, have shown atendency to choose mergers and acquisitions (M&As) with companies that already own
developed oil fields over the development of their own new oil fields and the construction ofpipelines or oil refineries. In addition, increased interest in environmental issues has radicallycurtailed the development of land owned by the federal government. As a result, the UnitedStates’ dependence on imported oil, which stood at 35 percent in the 1980s, now exceeds 50
percent. As well as placing greater importance on the supply of energy, the National Energy
Policy also emphasizes the role of the North American Free Trade Agreement (NAFTA) in
increasing the level of US energy security. The United States is promoting the North American
Energy Framework and is pursuing a “strategy of economic interdependence” in the Americas.
In Europe, energy security has always been an essential component of regional stability.
This is a consequence of the historical importance of coal and steel to the countries of theEuropean Union (EU). In the 1970s, the EU began to trade in natural gas with the former Soviet
Union. In the 1980s, however, just as this trade was starting to bear fruit, the Reagan
administration attempted to restrain it, so as to impede the Soviet Union. However, the countriesof Europe established guidelines for trading with the Soviet Union and developed a stablesystem of energy supply. Currently they are proceeding to the next step and are addressing theliberalization of energy trading within the EU.

The challenges for Japan and its responses
Japan suffers from a major geopolitical handicap in that it lacks its own energy resources.
During the oil crises, the situation became so serious that the very survival of the country wasat stake. In the end, however, Japan’s response to its situation was more successful than that ofany other country—a fact which served to bolster Japan’s self-confidence in the 1980s. Japan
managed to achieve economic growth without a corresponding increase in energy demand. Theenergy demand elasticity of real gross domestic product (GDP) before the oil crises was greaterthan 1; however, in the years between the first oil crisis and the mid-1980s, it fell to less than
0.3.
At the beginning of the twenty-first century, it is worth pausing to assess how well Japan
has been able to establish new energy strategies under these circumstances, as the unraveling of
the market principle in the oil market becomes apparent. Certainly, since the Third Conferenceof the Parties (COP3), the emission of greenhouse gases has become a high-profile politicalissue. Deregulation of the electric power industry, structural reform of the Japan National Oil
Corporation and similar topics are constantly in the news.

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Since the media has chosen to focus on environmental protection, deregulation and structuralreform, there has been insufficient debate on energy security, which cannot be resolved by themarket principle alone. Japan’s current oil supply structure, the result of a drive to rationalize
its economy and a quest for cheaper oil, can be characterized as being almost completelydependent on the Middle East. As a strategic measure, Japan has boldly chosen to ratify the
Kyoto Protocol, amidst confrontation between the US and Europe, without clarifying how it
intends to play its part in realizing the protocol’s objectives.
Again, it is Japan’s fate that it must rely on other countries for most of its energy and foodsupplies. Given current circumstances, Japan cannot rely on the market principle alone to securea stable energy supply. It is thus necessary to develop an energy strategy more in keeping withthe times.
There are many factors to consider relating to Japan’s energy security; however, I propose
to concentrate on the two themes of technology and interdependence.
Dealing first with technology, the peaceful use of nuclear power is one of the greatest
achievements of mankind in the twentieth century. To abandon nuclear power generation, simply
because of the inherent risk to human safety, is to deny the progress of science and technology.
It is a fact of life that progress in science and technology has always gone hand-in-hand withrisk. Those working in the nuclear power industry are doing their utmost to minimize theserisks. Nuclear power generation is highly significant strategically. It is indispensable because(1), as an additional source of energy it enhances a country’s energy security by reducing its
dependence on imported oil, and (2) as a source of energy which yields no CO2 emissions, it
may be seen as part of the solution to the problem of global warming. Since Japan is currently
highly reliant on other countries for its energy supply, it must devote maximum effort todeveloping nuclear power technologies.
We must also not forget Japan’s superior energy conservation technology and environmental
technologies. Energy conservation technologies developed by the Japanese motor industry, forexample the hybrid car, are among the best in the world. One theory has it that the reason why
the United States is reluctant to introduce fuel efficiency regulations for motor vehicles is thatits own automobile industry lags behind Japan in the area of fuel efficiency technology.
Transportation will account for the majority of future increases in energy demands. The
promotion of energy conservation technology will allow economic growth without excessive
increases in energy demand. This too has strategic significance for Japan’s energy security.
As for interdependence, this is the foreign strategy which Japan, dependent on imported
oil and treasuring its anti-nuclear and peace principles, must adopt. The Middle East, althoughalso part of Asia, is in truth very distant from Japan, both geographically and culturally. Japan,
however, enjoys an advantage over Europe and the United States in that it has no history of“bad blood” with the Middle East. Since a sudden reduction in Japan’s imports of Middle
Eastern oil would be unrealistic in the short term, Japan should endeavor to avoid “a clash of
civilizations.”

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Yuji Nakamura

There are still vast untapped reserves of natural gas in East Asia. It is a well-known factthat natural gas is a more environmentally sound source of energy than other fossil fuels. In
addition, natural gas deposits are not concentrated in any single region in the way that oil isconcentrated in the Middle East. This would allow Japan a wider range of energy sources. An
East Asian natural gas pipeline network was proposed a long time ago; however, many problems
remain unresolved, such as how the US$100 billion such a project would require is to be raised,and how the infrastructure necessary to protect such an investment is to be established.
Nevertheless, as the EU and NAFTA have already proved, the building of regional energy
networks is no less crucial than finance, telecommunications and trade to economic growth andsecurity. For a nation like Japan, with few energy resources of its own, the only way to survive
is to make the most of its human resources to create new technologies. In terms of foreign
policy, Japan must maintain national security by developing interdependent relationships with
its neighbors and must adopt the role of a trade-oriented country in order to make its contribution
to the world.

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About the author

Yuji Nakamura was seconded to IIPS from
Nippon Steel Corporation (NSC) as a
Senior Research Fellow in January 2001.
He majored in political economy at Waseda
University and joined NSC in 1981. In 1983,
he was seconded to the Institute forInternational Study and Training (IIST).
From 1984 to 1988, he worked in the Expo
department at NSC. Before joining IIPS, he
was responsible for line pipe exports fornatural gas trunk lines, mainly in Russia,
the Middle East, the North Sea and Asia.
While at IIPS, his research will focus onenergy and environmental issues. Yuji
Nakamura is also the author of IIPS Policy
Paper 282E, “The Historical Flow of Black
Gold: Two Approaches to Energy Security.”